On behalf of the Community Bankers Association of Illinois (hereinafter, “CBAI”), I am submitting this comment letter in response to the proposed “Interagency Guidance on Overdraft Protection Programs” (hereinafter, “Proposed Interagency Guidance”). The Proposed Interagency Guidance was published by the federal regulatory agencies, including the Federal Deposit Insurance Corporation, in the Federal Register on June 7, 2004 (Volume 69, Number 109).

With more than 500 member financial institutions and more than 140 associate members, CBAI is the largest state-organized trade association in Illinois representing the interests of financial institutions and is the third largest such association in the United States. CBAI is the leading advocate for community banks in Illinois, the state with more active bank charters than any other state in the nation. Our members include state-chartered and federally-chartered banks, savings banks and savings and loan associations that can be found in every one of Illinois’ 102 counties.

Among our roles on behalf of community banks in Illinois are the review of products and services in the marketplace that may be of interest to our members as well as the review of legislative and regulatory proposals that might affect the ability of our members to offer those products and services or the efficiency with which they can be offered. Given those roles, we appreciate this opportunity to comment on the Proposed Interagency Guidance.

General comments on the regulators’ assessment of overdraft protection servicesCBAI supports reasonable and accurate disclosures that are designed to educate a customer so that the customer can make an informed decision regarding whether he or she will elect to purchase or enroll in a particular product or service. To the extent that the Proposed Interagency Guidance recommends clear, accurate and useful disclosures, CBAI concurs with those recommendations. Unfortunately, the Proposed Interagency Guidance goes beyond that threshold by suggesting actions or obligations pertaining to overdraft protection programs that may not be warranted.

In setting the stage for the recommendations, the Proposed Interagency Guidance acknowledges an increase in “customer acceptance” of overdraft protection programs but states that certain aspects of such programs “have raised concerns....” Later, the Proposed Interagency Guidance refers to “existing and potential concerns surrounding the offering and administration of such overdraft protection services.” CBAI would prefer that federal regulations or guidelines addressing a currently available banking product or service should be rooted in evidence or data rather than concerns, whether those concerns are existing or potential. The Proposed Interagency Guidance does not include persuasive evidence that overdraft protection programs are generally anti-consumer in concept or in application. By comparison, in recent years there were numerous instances of predatory lending practices by mortgage brokers and other non-bank mortgage lenders. Regulators at both the state and federal levels responded to real and demonstrable abuses that cost unsophisticated mortgagors substantial financial losses and often resulted in foreclosure actions. If there have been abuses on a similar scale with respect to overdraft protection services, or if there is data indicating such an abusive trend, such evidence or data is lacking in the Proposed Interagency Guidance.

CBAI does not assume that overdraft protection services are somehow quasi-abusive and therefore should be reigned in by regulations or guidelines. Rather, CBAI takes the position that legitimate, reputable overdraft protection services are a modern extension of a service that has long been offered by banks. It was not necessarily safer for a bank to permit overdrafts on an ad hoc basis without the disclosures and policies that usually accompany today’s programs. The fact that today’s programs are more systematic and usually more automated may raise certain operational issues that are rightly addressed in the Proposed Interagency Guidance, but CBAI urges the federal regulatory agencies to be deliberate and not to act prematurely or unnecessarily unless there is data showing that the service is increasingly being utilized in an abusive or predatory manner.

Safety and soundness considerationsCBAI agrees that prudent policies and procedures should be in place to address operational risks associated with overdraft protection services. We disagree, however, with specific recommendations contained in the Proposed Interagency Guidance. For example, the suggestion that “overdraft balances should generally be charged off within 30 days from the date first overdrawn” is arbitrary, unrealistic and inconsistent (as conceded in the Proposed Interagency Guidance) with existing regulations affecting credit unions. The ability of the customer to pay down or fully repay an overdraft is in large part a function of his or her payroll periods and his or her historical account relationship with the bank. There is no magic to a 30-day rule and a bank should have ample discretion to assess repayment probabilities and schedules without imposing a one-size-fits-all rule. To tie the bank’s hands by suggesting that 30 days is the maximum allowable time frame in which the customer must resolve the overdraft status could result in negative credit information being reported to credit bureaus when, had the bank been left to its own reasoned judgment, full repayment of the overdraft might have occurred on Day 35, or Day 45, or some other day that would be within a reasonable time frame. Furthermore, as identified in the Proposed Interagency Guidance, federal regulations permit a credit union to carry an overdraft for 45 calendar days before the customer must repay the negative balance or come to some approved credit terms to cover the overdraft. There is no reason why a 30-day maximum should be urged upon some financial institutions while another set of their competitors (i.e., credit unions) is operating with a 45-day window. CBAI believes that a one-size-fits-all time frame is not advisable and that banks should be given discretion to establish their own standards, but that under no circumstances should the recommended time frame be less than the 45-day time frame under which credit unions may operate.

CBAI also disagrees that the dollar amounts of overdraft protection services that are available to customers should be reported for regulatory purposes as “unused commitments.” There are at least two problems with this provision. First, the vast majority of customers who automatically qualify for a bank’s overdraft service will never use the service because they manage their finances in such a way as to not create overdraft balances. These customers will nominally show an unused overdraft protection balance but will be unlikely to utilize it, and therefore categorizing these balances as “unused commitments” will vastly and unfairly misstate the true risk exposure of the bank. Secondly, unlike approved lines of credit, the Proposed Interagency Guidance stresses the discretionary element of overdraft protection services (i.e., the fact that the bank reserves the right to not pay any or all overdrafts pursuant to the bank’s policies). It occurs to CBAI that an unused overdraft protection service cannot simultaneously be (1) a discretionary privilege unilaterally under the control of the bank; and (2) a “commitment” to extend the unused balance to the customer such that it should be reported as an “unused commitment” for regulatory purposes.

Best practicesCBAI agrees with the following general principle stated in the Proposed Interagency Guidance: “Clear disclosures and explanations to consumers of the operation, costs, and limitations of an overdraft protection program and appropriate management oversight of the program are fundamental to enabling responsible use of overdraft protection.” The Proposed Interagency Guidance goes on to list numerous “best practices” that financial institutions are encouraged to consider. Many of the proposed best practices are reasonable (e.g., banks should not encourage routine and intentional overdrafts; banks should clearly disclose applicable fees; etc.). Some, however, raise issues or potential unintended consequences that may be worthy of further consideration.

One proposal suggests that bank personnel, when informing a consumer about overdraft protection, should perform a comparative analysis by describing and comparing the costs, advantages and disadvantages of other products or services that might be an alternative to overdraft protection. While CBAI believes that the bank should provide accurate and not misleading information about overdraft protection, we have concerns about a bank employee assuming a role that a customer could perceive as advisory in nature. However well-intended this proposed best practice may be, a bank employee should not be channeled into a conversation in which he or she is telling a customer that one product or service may be more beneficial than an alternative. Those types of conversations, even for a well-trained employee, can easily become a subject of dispute and potential liability exposure in extreme cases where the customer subsequently claims that he or she suffered some economic or reputational damage because he or she relied on the advice or analysis provided by the bank employee when, in retrospect, another alternative would have allowed the customer to escape a loss or damage that the customer has now sustained.

Another proposed best practice states that the bank should “(c)learly disclose to consumers the order in which the institution pays checks or processes other transactions (e.g., transactions at the ATM or point-of-sale terminal).” Clarification may be necessary with respect to suggested disclosure of “the order in which the institution pays checks....” Section 4-303 of the Uniform Commercial Code states that a bank may accept, pay, certify or charge against the account of its customer “items” in “any order.”

The Proposed Interagency Guidance suggests that when consumers attempt to execute non-check withdrawals (such as an ATM transaction), the consumer should first receive a message that completion of the transaction will trigger overdraft protection fees and the consumer should have the option to cancel the transaction after receiving that message. The Proposed Interagency Guidance, perhaps in recognition of the fact that such messages and technology would not be uniformly available at every ATM terminal accessible by the bank’s customer, also states that if the fee message and the right to cancel are not uniformly available, then the bank should post notices on its “proprietary ATMs explaining that withdrawals in excess of the actual balance will access the overdraft protection program and trigger fees for consumers who have overdraft protection services.” For some customers, this proposed best practice might be confusing and might lead to a misunderstanding. The customer, seeing that notice posted at the proprietary ATM but seeing no such notice posted at a competitor’s ATM on the other side of town, might draw an inaccurate conclusion that use of the ATM with no notice posted (i.e., the competitor’s ATM) will not have the same consequences as the use of his or her bank’s proprietary ATM where he or she saw the notice posted.

ConclusionCBAI’s membership includes many banks that offer overdraft protection services contemplated by the Proposed Interagency Guidance and many banks that have chosen not to offer such services. CBAI has never condoned abusive or predatory practices, and we have no objection to the imposition of reasonable and necessary restrictions, terms or conditions that are uniformly applied to all financial institutions and that do not impair the banks’ ability to efficiently deliver legal and common bank products and services to their customers. With respect to overdraft protection services, disclosures that are clear, accurate and not misleading are reasonable expectations. Prudent policies and internal risk management controls are also reasonable components of such a program. Many of the aspects of the Proposed Interagency Guidance are sensible and CBAI believes that banks and third party providers of overdraft protection programs or consultative services should implement them. However, CBAI is not persuaded that the federal regulatory agencies have stated a strong case for comprehensive regulation or guidance in this area. Absent data showing that customers are suffering significantly more harm than good from these programs, CBAI would encourage the agencies to avoid premature judgments about overdraft protection.

Specific areas of disagreement or concern, as expressed above, are based on CBAI’s assessment that the various proposals are arbitrary, that they are not reflective of the true nature or risk exposure associated with the overdraft protection service, or that they invite unintended consequences that could adversely affect the customer, the bank or both.

The community banks that are members of CBAI have outstanding records of customer service. We understand that many regulations and guidelines are designed to target the “bad apples” within our profession rather than to unnecessarily burden the vast majority of financial institutions that would not be inclined to engage in deceptive or unethical practices. CBAI urges the federal regulatory agencies to adopt only those guidelines that are reasonably necessary and that will allow financial institutions, and particularly community banks, to operate as efficiently as possible in the delivery of legal products and services to their customers.